Tax Planning/Cost Basis


Dear Mr. Fritzler,

In 1997 I inherited vacant land with probate value of $25,000.
In 2006 I sold it for $54,000 with monthly payments.
In 2014 with the principal balance $34,000 the land value plummeted because of wind turbines on one side and a developing gold mine on the other. The gold mine offered to buy us (the buyer and me) out for $30,000, so we did and split the money 50/50. What is my cost basis to use for my payoff of $15,000?  Do I use the original $25k?  Did I have a gain or a loss?
My wife and I have an annual income of $62,000.

Thank you very much for your help!

In 2006 you set the sale price at $54,000, at that time your basis was $25,000. You had a gain of $29,000. If you accepted more than 10% down, you were expected to pay the tax on the gain in that year.

If you subsequently, accepted a lower payoff, you would have to write it off as bad debt and attribute the unpaid amount to the buyer, who would then take that amount as income and pay the taxes on it.

You would have a loss that you would carry forward until you had an offsetting gain, or take $3000 per year against your ordinary income ($62,000).

That doesn't sound fair, does it? But that is simply one of the ways that the current tax structure, unfairly takes away from the individual.

If on the other hand, you did not correctly account for the sale in 2006, then:

1. If it is discovered your 2006 tax return may be subject to audit and since it would be more than a 25% underpayment the audit could spread to other years. If 7 years go by from the date of the last filing for that tax year, it becomes untouchable for the IRS. You are close tot he end of that clock.

2. Without that accounting, you might be able to make record of the actual deal that was struck this last year, and show the $17.000 as the total payment.

Hope that gives you some direction to pursue.

Tax Planning

All Answers

Answers by Expert:

Ask Experts


Richard Fritzler


I am in the business of tax planning for business owners. Our company helps business owners structure so that they can be reduce the taxes that they owe, making them far more profitable.


Since 1986 I have been helping successful business owners reduce taxes, protect assets, and limit their liability. The company is Owelesstax, incorporated at

National Small Business Owners Association.
Nevada Association of Listed Resident Agents.
Citizens Legal Association
The Business Owners Institute

Contributing author to "The Corporate Standard Newsletter".
I am also a writer for an email newsletter about business
I am also an Expert in the areas of Tax Law, Retirement Planning, and Estate tax issues.

I have been in the business of assisting business owners in reducing their taxes and liability for over 17 years. Providing retirement option that are not just tax deferred, and not limited to a "token" tax free contribution. Retirement plans that allow for total and complete access before you are 59.5 with no penalties

©2016 All rights reserved.